HPY Heartland Payment Systems, Inc.

Adjusted Quarterly EPS of $0.84

Ends Record Year with Another Quarter of Strong Growth

Heartland Payment Systems (NYSE: HPY), the nation's fifth largest payments processor and a leading provider of merchant business solutions, today announced Adjusted Net Income and Adjusted Earnings per share of $31.2 million and $0.84, respectively, for the quarter ended December 31, 2015. This compares to an Adjusted Net Loss and Adjusted Loss per share of $15.2 million and $0.42 per share, respectively, for the quarter ended December 31, 2014. The 2014 results reflected $41.4 million of pre-tax ($37.6 million after-tax, or $1.02 per share) asset impairment charges recorded in the fourth quarter, primarily related to our investment in Leaf and other Point-of-Sale (“POS”) assets. For the fourth quarter of fiscal 2015, Heartland’s GAAP net income was $22.7 million or $0.61 per share, compared to a GAAP net loss of $19.8 million, or $0.55 per share, in the fourth quarter of 2014. Adjusted Net Income and Adjusted Earnings per share are non-GAAP measures that are detailed later in this press release in the section “Reconciliation of Non-GAAP Financial Measures.”

Highlights for the fourth quarter of 2015 include:

• Small and Mid-Sized Enterprise (SME) processing volume of $24.0 billion, an increase of 14.2% from the fourth quarter of 2014, and the sixth consecutive quarter of double-digit growth.
• Net Revenue of $214.1 million, up 13.7% from the fourth quarter of 2014, driven by organic growth as well as acquisitions completed during the year.
• Record quarterly new margin installed of $28.1 million, up 30.9% from the fourth quarter of 2014, and the fastest rate of new margin installed growth in two years.
• Same store sales of 2.2% and net volume attrition of 10.8%.
• Results for the quarter included an approximately $0.11 per share gain on the sale of Smartlink (included in Other Income) and approximately $0.06 per share of expenses arising as a result of the announced transaction with Global Payments (included in General and Administrative Expenses).
• The combination of share-based compensation and acquisition-related amortization reduced earnings by $12.3 million pre-tax, or $0.23 per share, compared to $7.5 million pre-tax, or approximately $0.13 per share, in the fourth quarter of 2014.
• Year ago GAAP and Adjusted financial results included $41.4 million pre-tax, ($37.6 million after-tax) or $1.02 per share, in asset impairment charges related to our investments in Leaf and in Prosper, our internally-developed POS software, as well as our investment in TabbedOut, a mobile payments provider. The impairment charges were recorded against operating income, with the exception of the $4.0 million write down of TabbedOut.

Robert O. Carr, Chairman and CEO, said, “Results for the fourth quarter provide an emphatic conclusion to what has been the best year in the history of Heartland. We employed the same winning formula that has seen us report record results quarter after quarter this year: an increase in the size and productivity of our sales organization, record new business, the introduction of innovative new products and technology, and a focused effort on productivity and efficiency. This quarter we achieved the fastest rate of new margin installed since 2013, as we increased our relationship manager count to 1,240 at December 31, 2015, a 26% increase from a year ago, leading to the acceleration in new business growth. Payroll growth was also a standout this quarter, especially organic growth, where our Senior Product Advisor (SPA) strategy is achieving outstanding results. We have begun to roll the SPA strategy into other business lines. It’s been a great year, ending on a high note. I want to thank not only our dedicated employees for their tireless efforts, but also give a special recognition to our loyal shareholders for their support and encouragement.

“Our announced combination with Global Payments will be transformative for the worldwide payments industry, and represents a combination that I believe will become the most valuable payments company in the world. It combines two of the fastest organic growth businesses in the payments industry and creates the leading global provider of integrated payments technology solutions. Our customers will be in great hands, benefitting from both the most innovative tools and the best facilities in the industry. And through this combination, we can begin to leverage our existing relationships with ISVs outside the United States by adding our processing capabilities to their portfolio of Heartland services. It is exciting to team with a truly international company.”

Samir Zabaneh, Chief Financial Officer, added, “Heartland delivered another quarter of strong performance. We had excellent results across all business segments, with key performance indicators continuing to improve over the prior year and, in most cases, sequentially. We continued to achieve double digit organic revenue growth, as we did throughout the year, and improvement in adjusted operating margin, normalizing for unusual expenses related to the pending transaction. We have built a solid foundation that can support strong revenue growth, improved margins and attractive returns across the many new and exciting opportunities arising throughout the payments markets.”

SEGMENT REVENUE RESULTS:

PAYMENT PROCESSING

Payment processing net revenue increased by 4.8% in the quarter, with SME card processing net revenue up 4.7%, both of which reflected the impact of one-time revenue booked in the prior year related to Amex Opt Blue. Excluding this one-time item, SME card processing net revenue was up almost 10%. In the quarter, total SME card transaction processing volume was up 14.2%. Record new installed margin, positive same store sales and declining gross volume attrition all contributed to our sixth consecutive quarter of double-digit year-over-year processing volume growth. Gross volume attrition declined by 160 basis points for the quarter compared to the fourth quarter in 2014.

PAYROLL

Heartland Payroll net revenue was up 46% on an overall basis, and organic growth exceeded 20% for the quarter. This was a sequential acceleration from the 15% organic growth reported in the third quarter. This growth reflected the continued success of our dedicated payroll sales specialists and the recently accelerated expansion of the overall payroll sales team to capitalize on the key selling season. Segment operating margins in the quarter were 17.4%, representing the best profitability of the year and reflecting operating leverage and expense discipline.

SCHOOL SOLUTIONS

Heartland’s School Solutions net revenue rose 3.5% this quarter, with payment transactions processing up by 16%. Total quarterly revenue was reduced by elements which can vary by quarter, in particular equipment-related and software maintenance revenue. School Solutions reported a nearly 41% operating margin for the segment, driven by transaction processing related revenue growth.

CAMPUS SOLUTIONS

Heartland Campus Solutions total net revenue grew by 13% in the quarter. Revenue growth in Campus Solutions reflects organic growth at both TouchNet, which was acquired in the third quarter of 2014, and at ECSI.

HEARTLAND COMMERCE

Net revenue at Heartland Commerce, which is included in the Other segment, was $12.3 million in the quarter, continuing the trend of steady sequential revenue growth since Heartland Commerce was established last year. The increase was driven by strong growth at Xpient as well as the fourth quarter’s acquisition of Digital Dining, which added over 10,000 customer locations and $5 million of annual revenue to Heartland Commerce.

EXPENSES ASSOCIATED WITH PENDING TRANSACTION

General and administrative expenses include $2.2 million of costs associated with the pending transaction. The effective tax rate for the quarter was 41.4%, exceeding the statutory rate primarily due to the tax treatment of a number of expenses related to the pending transaction.

STOCK-BASED COMPENSATION

General and administrative costs also include a $4.8 million increase in stock-based compensation. Incentive compensation remains elevated in line with the strong financial performance at both the corporate and businesses unit levels.

FULL YEAR 2015 RESULTS:

For the full year of 2015, net revenue was $823.0 million, up 22.4% from $672.6 million in 2014. Adjusted Net Income and related earnings was $110.8 million, or $2.99 per share compared to $50.2 million, or $1.35 per share, in the prior year. Fiscal 2015 GAAP net income was $84.7 million, or $2.28 per share, compared to $33.9 million, or $0.91 per share. Full year 2014 GAAP and Adjusted results both reflect the $41.4 million of impairment charges recorded in the fourth quarter. Full year 2015 share-based compensation expense and acquisition-related amortization expense reduced pre-tax earnings by $41.6 million, or $0.71 per share, compared to $26.8 million, or $0.44 per share, in 2014.

BOARD DECLARES QUARTERLY DIVIDEND:

The Company also announced that the Board of Directors declared a quarterly dividend of $0.10 per common share, payable March 15, 2016 to shareholders of record on March 1, 2016.

About Heartland

Heartland Payment Systems, Inc. (NYSE: HPY), one of the largest payment processors in the United States, delivers credit/debit/prepaid card processing and security technology through Heartland Secure™ and its comprehensive Heartland breach warranty. Heartland also offers point of sale, mobile commerce, e-commerce, marketing solutions, payroll solutions, and related business solutions and services to more than 300,000 business and educational locations nationwide.

A FORTUNE 1000 company, Heartland is the founding supporter of the Merchant Bill of Rights, a public advocacy initiative that educates merchants about fair credit and debit card processing practices. Heartland also established the Sales Professional Bill of Rights to advocate for the rights of sales professionals everywhere.

Additional Information and Where to Find it

This communication does not constitute an offer to sell or a solicitation of an offer to sell or a solicitation of an offer to buy any securities or a solicitation of any vote or approval, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a proxy statement prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended, and otherwise in accordance with applicable law. This communication is being made in respect of the proposed business combination transaction between Heartland Payment Systems, Inc. (“Heartland”) and Global Payments Inc. (“Global Payments”). The proposed transaction will be submitted to the stockholders of Heartland for their consideration. In connection with the issuance of common stock of Global Payments in the proposed transaction, Global Payments will file with the SEC a Registration Statement on Form S-4 that will include a preliminary proxy statement/prospectus regarding the proposed transaction and each of Heartland and Global Payments plans to file with the SEC other documents regarding the proposed transaction. After the registration statement has been declared effective by the SEC, a definitive proxy statement/prospectus will be mailed to each Heartland stockholder entitled to vote at a special meeting in connection with the proposed transaction.

INVESTORS ARE URGED TO READ THE PROXY STATEMENT/PROSPECTUS AND ANY OTHER DOCUMENTS RELATING TO THE TRANSACTION FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY IF AND WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION.

A free copy of the proxy statement/prospectus, as well as other filings containing information about Global Payments and Heartland, may be obtained at the SEC’s website when filed. (www.sec.gov). You will also be able to obtain these documents, when filed, free of charge, from Global Payments at investors.globalpaymentsinc.com or from Heartland by accessing Heartland’s website at www.heartlandpaymentsystems.com/investor-relations. Copies of the proxy statement/prospectus when filed can also be obtained, free of charge, by directing a request to the Investor Relations department at Global Payments Inc., 10 Glenlake Parkway, North Tower, Atlanta, Georgia 30328-3473, Attention: Investor Relations, by calling (770) 829-8234, or by sending an e-mail to Investor.Relations@globalpay.com or to Heartland’s Investor Relations department at 90 Nassau Street, Second Floor, Princeton, NJ 08542 by calling (609) 683-3831 or by sending an e-mail to Heartland_ir@gregoryfca.com.

Participants in the Solicitation

Global Payments and Heartland and certain of their respective directors and officers may be deemed to be participants in the solicitation of proxies from the Heartland stockholders in respect of the proposed merger. Information regarding persons who may, under the rules of the SEC, be deemed participants in the solicitation of Heartland stockholders in connection with the proposed merger will be set forth in the proxy statement/prospectus when it is filed with the SEC. Information regarding Global Payments’ directors and executive officers is contained in Global Payments’ Annual Report on Form 10-K for the fiscal year ended May 31, 2015 and its Proxy Statement on Schedule 14A, dated September 25, 2015, which are filed with the SEC. Information regarding Heartland’s directors and executive officers is contained in Heartland’s Annual Report on Form 10-K for the year ended December 31, 2014 and its Proxy Statement on Schedule 14A, dated March 27, 2015, which are filed with the SEC.

Forward-looking Statements

This press release contains statements of a forward-looking nature which represent our management's beliefs and assumptions concerning future events. Forward-looking statements involve risks, uncertainties and assumptions and are based on information currently available to us. Actual results may differ materially from those expressed in the forward-looking statements due to many factors, including risks and additional factors that are described in the Company's Securities and Exchange Commission filings, including but not limited to the Company's annual report on Form 10-K for the year ended December 31, 2014. We undertake no obligation to update any forward-looking statements to reflect events or circumstances that may arise after the date of this release.

TABLES FOLLOW:

   

Heartland Payment Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(unaudited)

  Three Months Ended Year Ended December 31, December 31, 2015   2014 2015   2014 Total revenues $ 698,578   $ 604,613   $ 2,682,396   $ 2,311,381   Costs of services: Interchange 423,210 363,653 1,617,671 1,422,894 Dues, assessments and fees 61,219 52,644 241,767 215,862 Processing and servicing 82,403 80,026 328,630 285,011 Customer acquisition costs 15,174 12,070 59,458 46,977 Depreciation and amortization   11,935     10,126     45,317     30,598   Total costs of services 593,941 518,519 2,292,843 2,001,342

General and administrative

69,793 53,313 244,005 190,554 Goodwill impairment charge — 18,490 — 18,490 Asset impairment charges   —     18,875     —     18,875   Total expenses   663,734     609,197     2,536,848     2,229,261   Income (loss) from operations   34,844     (4,584 )   145,548     82,120   Other income (expense): Interest income 23 30 105 125 Interest expense (3,006 ) (3,607 ) (14,184 ) (8,057 ) Gain on sale of assets 7,008 — 7,008 — Other, net   (93 )   (4,313 )   (402 )   (444 ) Total other expense   3,932     (7,890 )   (7,473 )   (8,376 ) Income (loss) before income taxes 38,776 (12,474 ) 138,075 73,744 Provision for income taxes   16,069     7,297     53,343     41,876   Net income (loss) 22,707 (19,771 ) 84,732 31,868 Less: Net loss attributable to noncontrolling interests   —     —     —     (2,011 ) Net income loss attributable to Heartland $ 22,707   $ (19,771 ) $ 84,732   $ 33,879     Earnings (loss) per common share: Basic $ 0.62 $ (0.55 ) $ 2.31 $ 0.93 Diluted $ 0.61 $ (0.55 ) $ 2.28 $ 0.91   Weighted average number of common shares outstanding: Basic 36,782 36,253 36,646 36,354 Diluted 37,389 37,000 37,237 37,187      

Heartland Payment Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(unaudited)

  Three Months Ended Year Ended December 31, December 31, 2015   2014 2015   2014 Net income (loss) $ 22,707 $ (19,771 ) $ 84,732 $ 31,868 Other comprehensive income (loss):

Reclassification of losses (gains) on investments, net of income tax of $—, $—, $(7) and $108

— — 12 (170 )

Unrealized gains (losses) on investments, net of income tax of $(11), $(5), $6 and $(10)

(28 ) (56 ) 15 (50 )

Unrealized gains on derivative financial instruments, net of income tax of $3, $23, $54 and $106

  5     38     72   178   Comprehensive income (loss) 22,684 (19,789 ) 84,831 31,826 Less: Comprehensive loss attributable to noncontrolling interests   —     —     —   (2,011 ) Comprehensive income (loss) attributable to Heartland $ 22,684   $ (19,789 ) $ 84,831 $ 33,837      

Heartland Payment Systems, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(unaudited)

  December 31, 2015   2014 Assets Current assets: Cash and cash equivalents $ 56,483 $ 70,793 Funds held for customers 228,234 176,492 Receivables, net 267,292 234,104 Investments 109 106 Inventory 12,856 12,048 Prepaid expenses 20,733 22,658 Current tax assets   6,499     15,082   Total current assets 592,206 531,283 Capitalized customer acquisition costs, net 88,995 73,107 Property and equipment, net 166,692 154,303 Goodwill 490,020 425,712 Intangible assets, net 197,223 192,553 Deposits and other assets, net   1,543     1,507   Total assets $ 1,536,679   $ 1,378,465     Liabilities and Equity Current liabilities: Due to sponsor banks $ 31,803 $ 31,165 Accounts payable 70,418 58,460 Customer fund deposits 228,234 176,492 Processing liabilities 152,188 119,398 Current portion of accrued buyout liability 18,549 15,023 Current portion of borrowings 43,793 36,792 Current portion of unearned revenue 57,346 46,601 Accrued expenses and other liabilities   58,265     41,517   Total current liabilities 660,596 525,448 Deferred tax liabilities, net 51,283 36,496 Reserve for unrecognized tax benefits 6,599 7,315 Long-term borrowings 437,842 523,122 Long-term portion of accrued buyout liability 41,300 32,970 Long-term portion of unearned revenue   3,237     2,354   Total liabilities   1,200,857     1,127,705   Commitments and contingencies — —   Equity Common stock, $0.001 par value, 100,000,000 shares authorized, 36,933,825 and 36,344,921 shares issued and outstanding at December 31, 2015 and December 31, 2014 37 36 Additional paid-in capital 270,822 255,921 Accumulated other comprehensive loss (31 ) (130 ) Retained earnings (accumulated deficit)   64,994     (5,067 ) Total equity   335,822     250,760   Total liabilities and equity $ 1,536,679   $ 1,378,465      

Heartland Payment Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)   Year Ended December 31, 2015   2014 Cash flows from operating activities Net income $ 84,732 $ 31,868 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of capitalized customer acquisition costs 60,755 51,626 Other depreciation and amortization 62,955 48,270 Asset impairment charges — 37,365 Addition to loss reserves 2,852 9,650 Provision for doubtful receivables 6,155 3,279 Deferred taxes 8,157 7,515 Share-based compensation 21,262 13,269 Gain on sale of assets (7,008 ) — Write off of fixed assets and other 1,455 1,691 Changes in operating assets and liabilities: Increase in receivables (38,203 ) (18,134 ) Increase in inventory (1,302 ) (890 ) Payment of signing bonuses, net (48,289 ) (38,875 ) Increase in capitalized customer acquisition costs (28,562 ) (24,831 ) Decrease in current tax assets 18,175 2,188 Decrease (increase) in prepaid expenses, deposits and other assets 2,271 (3,153 ) Excess tax benefits on employee share-based compensation (9,634 ) (7,524 ) (Decrease) increase in reserve for unrecognized tax benefits (716 ) 1,682 Increase in due to sponsor banks 639 12,056 Increase (decrease) in accounts payable 9,555 (11,434 ) Increase in unearned revenue 8,608 1,554 Decrease in accrued expenses and other liabilities (5,822 ) (11,666 ) Increase (decrease) in processing liabilities 29,903 (21,123 ) Payouts of accrued buyout liability (15,408 ) (11,568 ) Increase in accrued buyout liability 27,264   20,182   Net cash provided by operating activities 189,794   92,997     Cash flows from investing activities Purchase of investments (2,283 ) (38,962 ) Sales of investments — 25,247 Maturities of investments 2,550 — Increase in funds held for customers (5,735 ) (35,420 ) Increase in customer fund deposits 5,467 49,003 Proceeds from sale of assets 9,973 — Acquisitions of businesses, net of cash acquired (79,354 ) (392,142 ) Capital expenditures (54,345 ) (54,913 ) Net cash used in investing activities (123,727 ) (447,187 )   Cash flows from financing activities Proceeds from borrowings, net 230,000 460,392 Principal payments on borrowings (308,250 ) (54,188 ) Proceeds from exercise of stock options 2,910 6,109 Excess tax benefits on employee share-based compensation 9,634 7,524 Repurchases of common stock — (54,455 ) Dividends paid on common stock (14,671 ) (12,331 ) Net cash (used in) provided by financing activities (80,377 ) 353,051     Net decrease in cash (14,310 ) (1,139 ) Cash at beginning of year 70,793   71,932   Cash at end of period $ 56,483   $ 70,793    

Reconciliation of Non-GAAP Financial Measures and Regulation G Disclosure

To supplement its consolidated financial statements presented in accordance with accounting principles generally accepted in the United States (“GAAP”), the Company provides additional measures of its operating results on a continuing operations basis, namely income from operations, operating margin, net income and earnings per share, which exclude acquisition-related amortization expense and share-based compensation expense. These measures meet the definition of a non-GAAP financial measure within the meaning of Regulation G promulgated by the Securities and Exchange Commission. The Company believes that application of these non-GAAP financial measures is appropriate to enhance understanding of its historical performance, its performance relative to its competitors, as well as prospects for its future performance.

This press release contains non-GAAP financial measures. Pursuant to Regulation G, a reconciliation of these non-GAAP financial measures with the comparable financial measures calculated in accordance with GAAP for the three and twelve months ended December 31, 2015 and 2014 follows (in thousands except per share data):

Three Months Ended December 31, 2015   GAAP  

Acquisition-related Amortization

 

Share-based Compensation

 

Adjusted Non-GAAP

Income from operations $ 34,844 $ 5,133 $ 7,122 $ 47,099 Operating margin (a) 16.3 % 22.0 % Net income attributable to Heartland $ 22,707 $ 3,131 $ 5,377 $ 31,215 Diluted earnings per share $ 0.61 $ 0.08 $ 0.15 $ 0.84 Diluted shares used in computing earnings per share 37,389 37,389   Three Months Ended December 31, 2014 GAAP

Acquisition-related Amortization

Share-based Compensation

Adjusted Non-GAAP

(Loss) income from operations $ (4,584 ) $ 5,133 $ 2,333 $ 2,882 Operating margin (a) (2.4 )% 1.5 % Net (loss) income attributable to Heartland $ (19,771 ) $ 3,167 $ 1,439 $ (15,165 ) (Loss) earnings per share $ (0.55 ) $ 0.09 $ 0.04 $ (0.42 ) Shares used in computing (loss) earnings per share 36,253 36,253   Year Ended December 31, 2015

GAAP

Acquisition-

related

Amortization

Share-based

Compensation

Adjusted

Non-GAAP

Income from operations $ 145,548 $ 20,351 $ 21,262 $ 187,161 Operating margin (a) 17.7 % 22.7 % Net income attributable to Heartland $ 84,732 $ 12,254 $ 13,836 $ 110,822 Diluted earnings per share $ 2.28 $ 0.33 $ 0.38 $ 2.99 Diluted shares used in computing earnings per share 37,237 37,237   Year Ended December 31, 2014 GAAP

Acquisition-

related

Amortization

Share-based

Compensation

Adjusted

Non-GAAP

Income from operations $ 82,120 $ 13,544 $ 13,269 $ 108,933 Operating margin (a) 12.2 % 16.2 % Net income attributable to Heartland $ 33,879 $ 8,262 $ 8,094 $ 50,235 Diluted earnings per share $ 0.91 $ 0.22 $ 0.22 $ 1.35 Diluted shares used in computing earnings per share 37,187 37,187           (a) Operating margin is measured as Income from operations divided by Net revenue. Net revenue is defined as total revenues less interchange fees and dues, assessments and fees.  

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Gregory FCA CommunicationsJoe Hassett, 610-228-2110Heartland_ir@gregoryfca.com